How to Invest in Stocks: A Survival Guide

Table of Contents:

  1. Stocks as a Path to Wealth
  2. What Are Stocks?
  3. Trading Places: A Short History of Stocks
  4. Why Invest in Stocks: Pros and Cons
  5. How Stock Market Trading Works
  6. Stock Market Research and Trading Strategies: “Best Bets” to Build Your Portfolio
  7. 10 Golden Rules for Stronger Stock Market Trading
  8. Stock Market Investing: Your Financial Future Is Now

Stocks as a Path to Wealth

“The best way to measure your investing success is not by whether you’re beating the market. It’s by putting in place a financial plan and a behavioral discipline that is going to get you where you want to go”
– Benjamin Graham

Stock market investing is one of the greatest wealth-creation vehicles in world history – if not the greatest.

And the data backs it up.

According to Standard & Poor’s comparison of stock, bond, and cash returns from 1926 to 2021, stocks easily produce the biggest gains for investors.

According to the study…

  • $1 invested in stocks in 1926 grew to $10,000 by 2021.
  • $1 invested in bonds in 1926 grew to $100 by 2021.
  • $1 invested in cash reserves in 1926 grew to $12 by 2021.

While the rewards are abundant, becoming a successful – and profitable – investor isn’t easy. To make money investing in stocks you need good money management skills and asset allocation… you need to understand your personal risk/reward profile… and you should outline your personal investing goals ahead of time. Then, of course, you need to find the right stocks to invest in.

Educating yourself on stocks and the financial markets can mean the difference between big portfolio gains and frustrating portfolio losses.

In this free report from InvestorPlace, we’ll explain how stocks work, demystify the complicated nature of stock trading, and provide a bullet-proof plan to maximize your stock market investment experience – for the short-term and the long-term.

What Are Stocks?

A stock represents a share of ownership of a publicly traded company.

As an investor the value of your ownership rises and falls with the company’s assets and earnings. When sales and earnings are growing, stock prices increase. When a stock’s price rises, investors make money on the shares they own. (Of course, stock prices can rise because of positive news, executive changes, or other things as well.)

Investors can also benefit from company dividends. Dividends, often paid quarterly in the form of cash or stock, are paid out from a company to its shareholders.

As a shareholder you can attend company shareholder meetings and occasionally vote on broad issues like confirming a board of directors, issuing new securities, and new company mergers and acquisitions, but your impact on company operations is limited.

Most stockholders are okay with that – the reason they invest in a company isn’t to run the business, it’s to benefit from superior financial performance that translates into higher stock prices.

On the downside, there’s no guarantee a company’s stock will rise in value. Stock prices can and do decline.

That’s why robust research and working with a trusted financial adviser can be a big help when investing in stocks.

At a Glance. recently rated the “10 best long-term investments” as follows – with eight slots reserved for stocks or stock-related investments.

Different Types of Stocks

Just like your favorite ice cream shop has myriad flavors of ice cream, stocks come in myriad categories, too.

These stock investment categories are among the most widely used. Nearly all investment/brokerage firms offer these categories of stocks.

Growth stocks. If you’re looking for an investment that offers the potential for accelerated market gains, growth stocks could be for you. Amazon, Google and Apple are all examples of growth companies that made it big, stock market-wise.

Growth stocks often come from fast-moving industries, like technology, fintech and biosciences. Company executives tend to take revenues and plow them back into the business, to encourage further operational and financial growth. (That’s why growth companies don’t pay dividends – they want profits put back to work inside the company.)

Be forewarned, though. Companies who operate in the fast lane tend to take risks that more conservative companies don’t. That could lead to falling revenues and sliding stock prices when business is off, or in downbeat economies.

Value stocks. If you’re looking to take your risk/reward exposure down a notch and want to buy stocks at discounted prices, value stocks could be in play.

Value stocks are more defensive-oriented securities that perform well in tumbling economies, as interest rates rise and money is tight. That’s primarily so as value stocks are usually a better deal than growth stocks when measured by key metrics like a company’s price/earnings ratio, i.e., what a stock buyer pays for each dollar of a company’s earnings.

Value stocks can offer solid returns, but historically at a slower pace than growth stocks. Bank stocks, like Bank of America, and consumer good stocks, like Proctor & Gamble, are good examples of value stocks.

Dividend stocks. Investors who prefer companies that return cash directly to shareholders often turn to dividend stocks.

Dividend stocks usually come from older, more established companies that have a reliable record of earnings and may not require as much cash as a growth or value company. Typically, dividend-paying companies distribute profits to shareholders on a quarterly basis and also commit to doing so on a regular basis going forward.

Big Fortune 500 consumer and industrial brands like Coca-Cola, Dow, Walmart, and 3M tend to offer cash dividends, with dividend yields as high as 3%, 4% or even 5%. Such companies are called “dividend aristocrats”, as they’ve boosted dividend dividends per share for a minimum of 25 consecutive years.

Large-cap, mid-cap and small-cap stocks. Stocks can also be categorized by the size of a publicly-traded company’s market capitalization, i.e., the total financial value of their shares of stock. To properly calculate a company’s “market cap”, simply multiply the total number of a company’s tradeable shares by the company’s current stock price.

Typically, that size is broken down into three categories: large-cap, mid-cap, and small-cap stocks.

Large-cap stocks. These stocks come with market capitalizations of $10 billion or higher. They’re stocks that are deemed by traders to be more conservative and consistent, and are widely traded on major market exchanges like the New York Stock Exchange.

Mid-cap stocks. Publicly-traded companies with a market capitalization of between $2 billion and $10 billion are known as mid-cap stocks.

These stocks may offer different trajectories for investors, either as last-year’s large-cap stock or next year’s small-cap stock.

Consequently, if you’re looking for a stock with a balanced blend of growth and value, mid-cap stocks can make sense for stock market investors.

Small-cap stocks. Small-cap stocks come with market caps of between $300 million to $2 billion (another higher-risk stock category – micro-caps – have market caps of up to $300 million.)

Since there are so many small-cap stocks, given the vast number of companies with market cap ranges that low, small-caps are both widely and actively traded, thus bringing more market volatility into the mix compared to large-cap and mid-cap stocks.

With more risk on the table, investors should be thorough in vetting small-cap stocks, which may offer more opportunity for gains, but also more potential for significant losses.

ESG stocks. So-called environmental, social and governance (ESG) stocks are geared toward the ethically-minded investor.

With ESG stocks, the focus isn’t primarily on profits, although that’s an important component. Equally important are the values and ethics on key factors like impact on the environment, demonstrated, shareholder rights, health impact (i.e., no tobacco, alcohol or firearms, for example), and company-related charitable and community impact.

Studies do show that not only are ESG stocks popular with the investing public, their return on investment is highly competitive, too.

International stocks. For investors who don’t mind some wanderlust, international stocks can be a solid performance and diversification addition to any investment portfolio.

These stocks, which are traded outside the U.S., offer the prospect of good returns with portfolio geographical diversity. After all, the U.S. isn’t the only country with a robust economy.

Foreign bourses like Japan, Australia, Brazil, Belgium and South Africa, among many other countries, can also produce fast-growing economies with risk and return tendencies that are different from the U.S., and that can balance out any stock portfolio that’s loaded up with U.S. stocks.

Additionally, international stocks can negate or minimize the impact of a declining U.S. dollar, which can be offset by investments in foreign companies in countries where currencies are robust.

That said, there is a decent element of risk associated with investing stocks from far off lands.

International stocks require serious due diligence before investing in them. Global investors can benefit from investing in foreign stocks funds and by working closely with a professional money manager with solid international stock trading experience.

Initial public offering (IPO) stocks. Publicly-traded stocks have to start somewhere, and that comes in the context of newly-minted IPO stocks.

These stocks allow private companies to start trading publicly via an initial public offering on stock exchanges like the New York Stock Exchange or Nasdaq. It’s not always easy to get in on the ground floor of a publicly-traded company but that’s exactly what IPO stocks offer.

Even so, steering cash into a new, possibly unproven IPO can be risky. Thus, limiting exposure to IPO stocks may be an idea worth considering.

Stock funds. If betting on the fortunes of individual stocks is too daunting or too complex, why not invest in mutual funds or index funds that provides broad diversity to stock-minded investors?

It’s fairly easy to get the best of both worlds with stock funds – access to all kinds of stock indexes and categories along with a diversified stock portfolio that owns potentially owns hundreds of stocks.

Stock funds make good sense for investors who don’t want to take on the research and management that comes with comes with stock trading on a full-time basis. Instead of buying a single small-cap or value stock, you can buy into major index-weighted funds, like an S&P 500 or Nasdaq 100 index funds.

Fees are increasingly investor friendly – at about 1% or lower for a good exchange-traded fund – and there’s no need to do the legwork, as the fund’s professional money manager takes care of that task for you.

Like stocks, stock funds come with a fair share of investment risk, as some funds can move 30% in either direction of the course of a year. In general, however, you get more safety and diversification element with stock funds than you do with individual stocks.

Robo-advisor. The digital age has had a significant impact on stock market investing.

Exhibit “A” is the robo-advisor approach, which allows investors to log onto an online investment site, fill out their investment goals, needs and timelines, and deposit some cash into the account.

The robo-investment advisor takes over from there, investing your money on your behalf, using your risk tolerance, time horizon, and short- and long-term investment goals.

Typically, the robo-advisor will place portfolio funds in low-cost mainstream index funds, thereby constructing a stock portfolio that’s unique to your needs for a low management cost (as low as 0.25% of your total assets on an annual basis.

Trading Places: A Short History of Stocks

Stocks – and the stock markets where securities are traded – date back to the 11th century. Then, French “brokers” handled trades between banks and farmers, based on the debts owed by agricultural landholders and the value of the commodities they produced (which rose and fell in value on a regular basis).

Two centuries later, a Belgian financier named Van de Burse began hosting merchants to trade commodities at his house in an early version of the stock market. Today we still use the word “bourse” to describe financial exchanges.

The first official stock exchange also originated in Europe. Merchants in Amsterdam gathered to swap shares of the Dutch East India Trading Co., the first publicly traded company that changed hands on a stock exchange.

America got into the action in the 1700s, when New York business owners gathered in lower Manhattan in what is now Wall Street to trade securities under a buttonwood tree. The experience went so well that the merchants created and signed the “Buttonwood Tree Agreement,” which historians credit with launching the New York Stock Exchange. The NYSE continues to be the largest stock exchange in the world today.

Stock exchanges proliferated during the late 1890s and early 1900s, a period which saw the Dow Jones Industrial Average and the Standard & Poor’s 500 index (both still key benchmarks for stock trading) play a major role in the trading and valuation of stocks on behalf of buyers and sellers.

Fast forward to the 21st centuries… and stocks are regularly traded digitally on major stock exchanges – the average daily trading volumes stood at 14.7 billion in 2021.

While the NYSE remains the largest stock exchange in the world, the all-electronic Nasdaq and major international exchanges like the ones in London and Tokyo have helped fuel an explosion in global stock trading.

At a Glance. The New York Stock Exchange (NYSE) is the largest securities exchange in the world, hosting 82% of the S&P 500, as well as 70 of the biggest corporations in the world.

Why Invest in Stocks? Pros and Cons

Given their track record as a reliable long-term investment option, there are decidedly more “pros” than “cons” when it comes to investing in stocks.

But investing in stocks is not without risk. When deciding to invest your hard-earned money in the markets, it important to understand the pros and cons…

The Pros

  • Robust historical performance. According to industry statistics, the S&P 500 Index has averaged 10% annual returns over the last 100 years. That far outpaces other investment vehicles like bonds, certificates of deposit (CDs), bank savings accounts, and commodities like gold and silver.
  • Stocks beat inflation, too – by a lot. At 10% average annual investment returns, stocks tend to stay well ahead of inflation, which usually clocks in at 2% or 3% annually.
  • Stocks are easy to buy. With a vast array of brokerage services and online trading sites, stocks have never been easier to purchase. Many brokerages have removed historical barriers to buying stocks, like account minimums, high fees, and paid stock research programs.
  • Multiple ways to make stocks pay off. Stock market investors can choose from multiple investment return models. For instance, they can buy shares of individual stocks, buy fractional shares of individual stocks, and buy “bundled” stocks in the form of exchange-traded funds (ETFs) or index funds. Stock market investors can go for short-term gains or invest for the long term to save money for retirement. Investors can even be paid for owning stocks through dividends.
  • Stocks are highly liquid. Most stocks are readily bought and sold, giving investors a level of comfort that they can turn their stock shares into cash quickly, if needed.

The Cons

  • No guarantee of positive returns. Stocks aren’t bulletproof. Investors can and do lose money on stocks that don’t perform well. Stock market investors need to know going into it that they can lose money with stocks and adjust their expectations – and their investment strategies – accordingly.
  • Investors face multiple risk issues. Whether it’s the risk of losing some or all of your money, the risk that your investments may not be liquid enough to sell quickly, or the risk that your stock portfolio isn’t sufficiently diversified, investors have to account for myriad outcomes – bad and good – when investing in stocks.
  • You need to do your homework. While wealthier investors frequently lean on professional stockbrokers to build their portfolios, Main Street investors often research stocks and markets on their own. That takes time, discipline, and patience. After all, you likely wouldn’t buy a car without kicking a few tires. The same goes for stock research, which can involve reading complex financial documents, tracking the news regularly, using highly sophisticated trading tools and charts, and budgeting the appropriate amount of money needed to meet your unique portfolio investment needs.
  • Tax issues. While stock market investors can benefit from certain tax breaks if you sell a stock for a loss, selling for a gain results in a capital gains tax. Capitol gains taxes vary in percentage depending on how long you’ve held the stock. Taxes tend to be higher on short-term holdings – usually under a year. In other words, day and swing traders pay a lot more in taxes than long-term investors.
  • Potentially high stress. Stocks can take an emotional toll on investors, particularly those who take higher risks. That can lead to unfortunate scenarios like selling out of fear or trying to “time the market” by removing money from stock portfolio accounts when stocks decline – and then missing out when the market rebounds.

At a Glance: Build a reading list before you invest. Becoming a good stock investor means becoming a good reader.

That means regular reviewing key investment documents like annual company reports, Standard & Poor’s stock reports company 10K and 10Q reports filed with the U.S. Securities and Exchange Commission (SEC), and media like InvestorPlace, The Wall Street Journal, and other informative investment content.

On Wall Street, a little knowledge goes a long way, so get in the habit of reading the stock market data and news that makes you a smarter investor.

How Stock Market Trading Works

Before starting to invest, job one is to understand why companies issue stock and what that process means to you as an investor.

Basically, companies issue stock shares to raise money to run their operations. Using stock share income enables companies to hire employees, conduct research, build plants and offices, and acquire other companies – just for starters.

A company’s first step in issuing stock shares is to go through an initial public offering. An IPO means a company is issuing stock shares publicly for the first time. Once the IPO is complete, the shares are traded publicly on a stock exchange – like the NYSE or Nasdaq – for anyone to buy or sell.

When you buy a company’s stock, you’re not buying it from the company itself; you’re actually buying it from other investors who own shares in that company. Correspondingly, if you sell shares in a company’s stock, you won’t be selling the stock back to the company. Instead, you’ll be selling the stock to another investor.

Stock trades are executed by a broker or trader, via a stock exchange, such as the NYSE or Nasdaq. Today, it’s common for investors to purchase stocks online through a broker’s digital trading platform, which connects the investor to the appropriate stock exchange where the specific stock trades.

Once you understand how and where stocks are traded, your next step is to open a stock brokerage account. Here’s a step-by-step process to get the job done right.

  1. Establish what kind of brokerage account suits you best.

The right kind of stock brokerage account depends on your unique investment needs. Usually, that scenario leads to one of several stock trading accounts.

  • A traditional brokerage account: A traditional stock brokerage account, formally known as a taxable brokerage account or a standard brokerage account, is a popular choice for investors who don’t have complicated investment portfolios. If you simply want to trade stocks from time to time or trade stocks to meet short-term personal financial goals, a traditional brokerage account is a solid option.
  • A margin account: If you have a little more risk appetite, you can open a traditional broker account with a margin account add-on. Margin accounts enable you to borrow money from the brokerage firm to trade more stocks, using your stock portfolio as collateral. Expect to pay interest on any funds borrowed via a margin account, and note that margin accounts come with abundant risk.If, for instance, the market drops significantly, the brokerage firm can demand payment on your margin loans immediately. If you can’t make the payments, the brokerage can legally seize your portfolio assets to cover the costs of the margin loan.
  • An IRA account: New stock market investors with a long-term horizon may opt for an individual retirement account (IRA) geared to stashing money away for retirement.The upside to IRA accounts are the tax deductions that come part and parcel with such accounts. One downside is that you can’t access your account funds until age 59-and-a-half. If you raid your IRA prior to that time, you face hefty fines and penalties imposed by Uncle Sam.Roth IRA accounts enable you to access your account funds more easily. Just note that account withdrawals are limited to direct contributions – investment profits cannot be taken out of the account.
  1. Start shopping for the best trading platform deals.

Brokerage charges and fees have significantly declined over the past decade, as online trading platforms have driven market prices down.

While that’s good news for new stock traders, it’s still a good idea to price shop before putting any money down is a stock brokerage account.

Launch that process with a full review of any broker’s pricing schedules. Increasingly, basic “buy” and “sell” executions come with either no or low service fees. If, however, you want to trade other assets, like bonds, commodities, equity options, cryptocurrencies, or ETFs, you’ll likely pay a higher fee to do so.

For firms that charge fees, the average stands at about $3 to $7 per trade. Thanks in part to Robinhood’s free trading platform gaining in popularity the last few years, many online brokerage firms have lowered their fees to $0 for unassisted stock trades.

You can also anticipate additional charges, such as annual account fees (about $50 to $75 per year); research fees (from $1 to $30 per month); and paper statement fees (about $2 per month), in addition to other fees related to more complex trading strategies. Brokerage firms outline their fee structure on their websites, so be sure to check them out so you are not surprised later.

  1. Know what features you’re getting.

In addition to looking at stock trading costs, new investors should thoroughly review the features and amenities offered by brokerage/trading firms.

Here’s a short list of items that should be offered by a brokerage firm:

  • Good research. Smart stock trading doesn’t usually happen without access to quality research. When choosing a trading firm, make sure it offers a robust stock rating feature along with clean access to quality stock research firms like Morningstar or Standard & Poor’s.
  • A solid trading platform. Efficient, easy-to-use trading software is a “must have” for any stock investor – especially a new one. Ask your broker about its trading software features (for example,, does it allow for trading foreign stocks or cryptocurrencies; does it allow trading of fractional shares; what’s the mobile app trading experience like; and can you actively test the trading software before paying for the service?). Ask around and see what trading platform your friends, families, and other experienced traders recommend. Online reviews are easy to find and can help you evaluate a brokerage’s stock trade services.
  • Help desk and customer service. A stock trading platform is only as good as its customer service – and so you should vet a brokerage’s customer experience. Check to see if the trading firm has the customer service options you need, such as face-to-face branch office availability, 24/7 customer services by phone, an easy-to-use and reliable mobile app, account features like easy money transfers, and online/mobile full trading services.

Again, ask around and leverage web reviews to see if a potential brokerage trading partner meets your specific needs.

  1. Make your decision.

Okay, you’ve done your research and vetted potential brokerage partners – now it’s time to make a decision and start trading stocks.

You want to choose a brokerage firm that offers the best trading tools at an affordable price. You’ll want a trading partner that offers superior customer service and caters to stock-trading beginners.

Don’t make this process too complicated.

Start a “pros” and “cons” list for each of the brokerage firms under consideration. Whichever one has the best ratio of “pros” to “cons” should be your winner. If you’re still in doubt, share your list with trusted friends and family and any regular stock traders you know. They can help pick the stock trading platform that best meets your best unique needs.

  1. Fill out your account information.

Once you’ve chosen a firm, it’s time to complete your new brokerage account information.

Most trading firms offer online account registration, which can make for a quick and easy process.

When you open up the sign-in document, expect to include the following information in your account registration process:

  • Name
  • Phone number
  • Address
  • Social Security number
  • Driver’s license information
  • Employment status
  • Investable assets
  • Investment goals
  • Your net worth (possibly)

You’ll also need to include your banking information, especially your preferred way of funding your account and taking withdrawals.

These options include:

  • E-funds transfer. This mechanism enables you to send and receive money by linking your checking account to the bank’s electronic payment system. Expect payments to hit your account the next business day.
  • Wire transfer. This mode of bank payment allows you to see payments completed within a few minutes, as a bank-to-bank payment transfer is a quick and seamless process.
  • Paper checks. Brokerage firms still accept traditional paper checks, but the process may take several days to complete.
  • Rolled-over assets. Sometimes, new investors need to transmit funds directly from their 401(k) or IRA accounts. That’s perfectly acceptable – just ask your broker the best way to set payments up using rollover accounts.

One note on funding your trading firm account. No matter what banking mechanism you use to fund and receive payments with your brokerage firm, you may have to meet minimum funding and operating levels (usually between $100 and $500 for traditional accounts, or a $1,000-and-up minimum account level for more sophisticated accounts).

That’s it – now you’re ready to buy and sell stocks.

It’s a good idea to talk to a trusted financial professional about your investment goals and stock trading preferences. A good, local financial planner should do the trick.

The National Association of Personal Financial Advisors (NAPFA) offers a good database of certified U.S.-based financial planners to choose from – just plug in your ZIP code and start searching right away here.

At a Glance: Sample Brokerage Firm Account Form. The U.S. Financial Industry Regulatory Authority (FINRA) offers a helpful sample brokerage account form. Check it out before your fill out the real thing so you’ll know what to expect.

Stock Market Research and Trading Strategies: “Best Bets” to Build Your Portfolio

There’s no shortage of ways to structure a stock trading strategy, but some trading models have stood the test of time better than others – especially for traders just starting out.

Let’s look at the most common and effective stock trading strategies, and see how they might fit into your long-term portfolio management experience.

Before you begin, make sure to review your investment goals, current household budget, current household cash flow, and investment risk tolerance.

It’s highly advisable to keep your stock purchase activity well inside the constraints of your household finances – for the short and long term. Remember: You can lose money trading stocks, and you shouldn’t go into debt by overbuying stocks, especially when you’re just getting the lay of the market land.

Value Investing

One of the best, and safer, stock market investment strategies can be found in value investing.

Value investing is the bargain shopping corner of the stock investment landscape. Value investors like Berkshire Hathaway founder Warren Buffet and former Fidelity Investments star manager Peter Lynch believed that certain stocks are undervalued, and that there are characteristics and clues available to help investors single out value stocks.

The great value investors also believe there are certain irregularities in the stock market that trigger discounted prices in select stocks.

Those traders didn’t need to comb through volumes of complex financial data to pick good value stocks. Instead, they leaned on bedrock corporate finance principles like company cash flow, price-versus-earnings, market share, annual revenue minus debt, and the ability and length of term of company decision makers.

The great value investors don’t place a high priority on sophisticated trading charts and market algorithms. Instead, they place it on a simple concept – is the underlying company a good, well-run business that can thrive over the long haul? (Remember, as a market investor, you’re not really buying stocks – you’re buying companies.)

Time matters, too. So-called “buy and hold” investors like Buffet view value stocks as long-term propositions. As long as performance remains stable and strong, there’s no reason to sell a value stock early – not when value investors make stock investment selections based on years (even decades) of company performance, and with future decades of share growth in mind.

One of the best and simplest formulas for uncovering hidden stock market gems that produce gains over the long term is a company’s price-to-earnings ratio.

A company’s price/earnings ratio, also known as the P/E ratio, is represented by a business’s stock share price and its earnings per share. Value investors use the P/E ratio to essentially peg the real value of the company (hence the term “value investing”).

The goal for any value stock investor is to leverage a company’s P/E ratio to evaluate current and future expectations for a stock, based on the price per unit that investor will be willing to pay for a specific value stock.

While a firm’s P/E ratio is certainly an important factor in valuing a stock, it’s not the only one. You should include good research on a company’s history, its executive team, and its ability to build robust market share – and on potential stock dividend payouts – in any value stock investment strategy.

What to look for in a value stock:

  • A robust earnings per share.
  • A company with a good rating from Standard & Poor’s (B or better).
  • A company with low debt. (Check its ratio of assets to liabilities.)
  • Positive earnings growth over time.
  • A company that gives back dividends.

At a Glance: Value Stocks Can Be a Reliable Investment. Vanguard Investments expects value stocks to outperform growth stocks by 5% to 7% over the next decade, and “perhaps by even a wider margin over the next five years.”

A good way to track value stocks is through the Russell 1000 Index, which is a value-weighted index composed of 1,000 of the largest U.S. companies, by market capitalization.

Growth Stocks

Unlike, value investing, which is focused on the current earnings and overall financial health of a company, growth investors place a higher priority on the future growth of select companies.

No doubt, early investors were handsomely rewarded with early purchases of stocks in companies like Apple, Amazon and Google. Yet for every Apple, there are hundreds of thousands of small company stocks that don’t grow, and thus disappoint investors.

That’s the trick with growth stocks – figuring out which ones offer robust upside growth based on future earnings.

If you hit the mark with a growth stock, the return can be substantial. Over the past 10 years, growth stocks have outperformed value stocks by an average of 7.8%, although value stocks tend to outperform growth on a 10-year time line basis dating back to the 1930s, according to Vanguard Investments.

Structurally, growth investors seek companies with evidence of strong future earnings.

Growth investors may use a variety of analytical tools to properly evaluate a growing company, including the industry it resides in and the prospects of future earnings growth inside that industry.

For example, if a growth investor is probing an electric car manufacturer like Tesla, that investor may spend as much time studying the electric vehicle market as they will be researching Tesla.

By taking an industry-intensive approach to stock picking, a growth investor hopefully can uncover the potential for a company’s growth potential in that industry for decades to come. That said, a growth approach also considers a company’s current earnings picture, along with a potential trend of robust earnings and sales that provide evidence of long-term growth.

Growth stocks also can be cyclical in nature. Market data show that growth stocks tend to do well in periods of economic growth when interest rates are low. In periods of economic decline, when rates tend to trend higher, growth stocks underperform against other asset investment models.

What to look for in a growth stock:

  • A company with good, experienced leadership.
  • A company that’s in an industry with strong growth potential.
  • A company with robust sales.
  • A company with a big target market.
  • A company with profit margins that increase over time.

At a Glance: No Dividends With Growth Stocks. One feature that most growth stocks won’t provide is dividend payments.

When companies are growing at a speedy pace, company decision makers prefer to pour stock market proceeds back into the company in order to accelerate even faster growth rates. In that scenario, dividend payments are deemed a luxury that competitive growth companies can’t afford.

To best track growth stocks, the Dow Jones U.S. Small-Cap Growth Total Stock Market Index is a good index to follow on a regular basis.

Momentum Investing

Another, lesser-known stock market investment strategy – at least compared to growth and value investing – is momentum investing.

Momentum investing is the risk takers’ table in the stock market dining room. Investors who adhere to momentum investing (also known as “ride the wave” investing) rely on technical analysis and crunching data to find stocks that offer the potential to rise dramatically in short periods of time.

They study tiny share-price patterns that point to small slivers of opportunity of market growth – opportunities that may only offer a short trading window just minutes long.

Momentum investing is especially popular with so-called day traders. These are aggressive traders who spend their days looking to exploit inefficiencies in the market, snapping up shares of stock that have – if the data is right – short bursts of upward stock movement.

When the data show the stock is no longer in ascendency, momentum traders sell out of the position as quickly as possible, and then move on to the next “technical” stock opportunity.

While there’s a case to be made that day trading can produce good returns for traders with deep experience moving in and out of positions quickly, momentum trading is not a smart option for new investors.

Aside from a knowledge deficiency, new investors who embrace momentum-based day trading face significantly higher trading risks, potentially sky-high trading costs, and long days on the computer studying data algorithms and weighing trade opportunity after trade opportunity.

For now, at least until you get up to speed on the markets and share-price movements, it’s best to forego the machine-gun style of stock market trading and focus instead on studying growth and value stocks with an eye for the long haul.

Always Be a Regular Investor

No matter what stock strategy you use, having a set schedule to invest and aiming to invest regularly can make a big difference over time.

Here’s why.

Imagine that Investor A and Investor B both have opened a stock brokerage account with a $5,000 initial deposit. The market is largely robust over a decade, and average annual returns amount to 12% each year, leaving approximately $15,500 in one investor’s account, but not the other’s.

That’s because Investor A did something Investor B did not – adding an extra $50 to her brokerage account to buy more stocks. She did so for the same 10-year period. Instead of having $15,500 in her investment account after the 10-year period, Investor A had $27,300 in her account.

If either investor had added $100 to the trading account each month, the returns would have been even higher, given the same time period and the same 12% average annual returns. In that scenario, the original $5,000 investment would have grown to a whopping $39,000.

The moral of the story?

Regular contributions to your stock trading account can substantially help grow your assets under management. That’s a habit every stock investor should be pursuing.

The Takeaway on Stock Market Trading Strategies

No matter which stock market trading strategy you choose, don’t sell the process short.

It’s a process that takes time, discipline, and diligence – and that makes the process of selecting stocks as equally important as the outcomes the strategy produces.

By immersing key factors like risk tolerance, time constraints, and a personal budget into the mix, fledgling investors can maximize their stock trading strategy experience – and to a long and potentially prosperous run as a stock market investor.

At a Glance: Common Stock Orders Defined.

When you start buying stocks, it’s easy to be overwhelmed by the jargon. Don’t let that get to you – keep the process simple with these common stock execution definitions.

Ask. This tells buyers what price sellers are willing to accept for a stock.

Bid. This describes the price that buyers are willing to pay when buying a stock.

Spread. This is difference between the highest bid price and the lowest ask price for a stock.

Market order. This describes an investor’s call to buy or sell a stock as soon as possible as the best available price.

Limit order. This terms to a call from an investor to buy or sell a stock at a specific price or better.

Stop-loss order. When a stock hits a certain price, a “stop” or “stop-loss” order triggers an automatic market trade execution where the buyer’s stock position is partially or fully sold.

10 Golden Rules for Stronger Stock Market Trading

With our foundational pieces in place, let’s add to the “starting out” experience with several time-tested tips to better market trading results. Each should fit nicely into a new stock trader’s tool kit.

  1. Conduct a self-audit before investing a dollar in stocks.

Former heavyweight boxing champion Mike Tyson once said that “Everybody has a plan until they get punched in the mouth.”

Wise words, indeed. That’s exactly why your portfolio investment plan has to be bulletproof, and why the planning process should start with a thorough and honest self-audit.

Assessing factors like your investment goals and your cash-flow situation before buying stocks are all components of a financial self-audit.

Don’t flinch with your pre-stock trading self-assessment. The more you know about your household financial situation, the better financial steward you’ll be when the markets get chaotic and the fists start flying – with your money on the line.

In stock investing, stability counts for a whole lot. Good financial planning before you start buying stocks can build the foundation needed to grow your portfolio assets over time, within the confines of a good household budget and a solid long-term investment strategy.

  1. Leverage IRA account trading.

New stock market investors can take some financial risk out of the equation by opening an IRA account with their stock brokerage firm.

Most online brokerage firms accept IRA accounts for stock trading and make them easy to open and to start trading.

The big advantage is that you can steer up to $6,000 annually into your IRA account ($7,000 for Americans over the age of 50) in a tax-advantaged basis, which can add account funds to your stock trading experience.

One note of caution: IRA withdrawals before the age of 59-and-a-half can trigger IRS fees and penalties. When you use IRA funds to trade, think long term – a good idea for most stock investors.

  1. Balance your stock portfolio with index funds.

Chances are that you won’t want an investment portfolio that’s top-heavy with stocks. It can be risky to do so, especially for new investors with little experience managing an investment portfolio.

That’s where index funds can help. Instead of laying all out your cash on a few stocks, parcel some cash out for index funds or ETFs that pool dozens or even hundreds of stocks into one fund.

Having a stake in 10 funds instead of 100 individual stocks reduces overall investment risk, but still allows investors to take advantage of effective investment vehicles like value stocks, growth stocks, international stocks, and sector-specific stocks like technology, healthcare, or banking and finance.

Additionally, index funds and ETFs come with low fees – sometimes as low as 0.100% to 0.25% of all assets under management.

  1. Limit your stock investments at first.

When you’re starting out as a stock investor, it’s a good idea to limit your stock investments until you’ve gained more experience as a market trader. There’s no standard rule of thumb, but many financial planners advise limiting the individual stock portion of your investment portfolio to 10% or 15%.

Working regularly with a financial planner, you can adjust the stock portion of your overall portfolio over time, as you become more familiar with securities trading.

  1. Avoid penny stocks.

So-called penny stocks are just what you may think – the bargain bin for securities traders.

As a new stock market investor, give penny stocks a wide birth. They not only come with high risk, but they can be difficult to trade (not many buyers want them) and can easily be delisted by major stock exchanges – usually for significant price declines or malfeasance by the company.

  1. Don’t “trade the news.”

While it’s understandingly tempting to buy and sell stock shares based on what you see on CNBC, what you read in The Wall Street Journal, or what you see on Twitter, resist the urge. Short-term swings based on company or industry news are likely temporary and go against your long-term “buy and hold” strategy.

As long as you’re stocking your portfolio with solid companies that perform over time, ignore the news and stick to your investment plan. After all, news comes and goes, but a good investment strategy stays for the long haul.

  1. Take advantage of dollar-cost averaging.

Stock trading success largely depends on buying low and selling high, but that’s not possible when investing in chaotic markets with millions of trades executed every day.

One way to benefit more regularly from market fluctuations when buying stocks is through dollar-cost averaging (DCA). This investment strategy curbs the impact of high market volatility when buying stocks. With DCA, instead of making a single lump-sum stock purchase, you buy smaller amounts of stocks on a predetermined periodic timetable (monthly or quarterly, for example), until you own the number of shares needed, based on your investment strategy.

This “slow and steady” stock-buying strategy can take an abundant amount of pricing risk out of the equation, while keeping your stock market investment goals in good standing.

  1. Use a paper-trading account before using the real thing.

Most reputable stock brokerage firms will offer you the opportunity to practice trading via “test” market trading software. With demo trading, you can dip into the trading waters and gain valuable knowledge on how stocks work and how they’re traded on various exchanges.

Better yet, you won’t absorb any financial losses when you make trading mistakes. The genuine accounting won’t take place until you begin trading for real – which you’ll be bettered prepared for after a few weeks of demo-stock trading.

  1. Emphasize logic over emotion.

Even the best stock pickers make mistakes, and you will, too. The worst mistakes, however, are when you make market moves out of fear or emotion, and not logic and reasoning.

Warren Buffett once advised Main Street investors to “control your urges” when trading, and that’s good advice. Let your head, and not your heart (or, worse, your stomach), make the final call on tough trades. As the old adage goes, when you can keep your head on when others are losing theirs, you’re way ahead of the game – and usually the market, too.

  1. Don’t be a speculator – be an investor.

Buffett also once famously said that it’s “far better to buy a good company at a fair price than it is to buy a fair company at a good price.”

Those should be words to live by for new stock investors. Take risk out of the equation with good research and a disciplined trading mindset that aims for singles and doubles and not great slams. When you swing for the fences on Wall Street, you wind up striking out a lot.

At a Glance: “An investment in knowledge pays the best interest.” –Ben Franklin

Stock Market Investing: Your Financial Future Is Now

When it comes to learning how to invest and building the habits of a savvy stock trader, the future really is now.

By embracing the tenets listed above and taking the time needed to educate yourself on the stock market, you’re taking the first action steps in becoming the trader you need to be to really build wealth over the long haul.

Even better, watching your investment portfolio grow over time is one of the substantial joys of stock market investing.

After all, growth means expanding, and that’s the goal of any stock market investor.

So get going today. Take the proven path to financial security with a time-tested means of helping you reach your lifetime financial goals – one share of stock at a time

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